Monday, June 16, 2008

What Happens When An LLC Member Dies?

Got an email today from an individual who is a member of an LLC with two members and no operating agreement. The LLC operates a bar / restaurant and the other member died suddenly. Guess what? Without an operating agreement, the deceased member's LLC interest goes into his estate and, most likely, the spouse of the deceased member ends up as your new partner. Not all written operating agreements deal with the death or withdrawal of a member. They are somewhat complicated for one unsophisticated in business to plan for but, should the worst come to pass, you end up so much farther ahead and avoid mucho aggravation if the situation is properly planned for on the front end. The LLC operating agreement should contain a buy-sell agreement covering the death of a member.

Article VII of this sample operating agreement contains a buy-sell agreement with transfer restrictions. Section 7.3 specifically deals with the death of a member.

12 comments:

Sandra MacDonald said...

Can a LLC agreement have contingency beneficiaries? ie My partner and their spouse both die in an accident... what happens then, does my partnership go to their children or preferred interests or can my partner and I both designate a 3rd party?

jjray said...

An LLC operating agreement is not an estate planning vehicle per se. A buy-sell agreement (which can be written into an operating agreement) is usually triggered on death of a member. The buy-sell agreement sets a buyout price paid for the deceased member's interest but does not name beneficiaries. This would be done in one's will. If you wish to avoid probate, I believe one could set up a revocable trust and name it as owner of an LLC interest. The revocable trust would name beneficiaries and could further name contingent beneficiaries. Another option might be a transfer on death designation of the LLC interest to a trust for those states with broad TOD laws. But I'd check with a local lawyer in your state before trying to arrange a TOD designation through an LLC operating agreement

Anonymous said...

So, my husband is in a multi-member LLC. There are two members, my husband and another guy who just died. They had a very small operating agreement drafted and notorized saying that the business could not be left, inherited, sold to, abandoned, etc. to anyone except the other member. So now what? Can we still carry on as a multi-member LLC? Do we now have to change our whole business entity? Is it too late to add member to maybe not have to incur this change?

jjray said...

Reply to Anonymous. Can you carry on as before using the same LLC? Yes. Can you add new members? Yes per the existing operating agreement. However, the operating agreement must have had some sort of consequences for when a member dies. What I mean is the estate of the dead member must get some sort of compensation for the member interest if transfer is disallowed. Based on the thin facts given in your comment, I can't say more.

Anonymous said...

My husband was the sole member of an LLC. He died. Can the spouse/I assume responsibility for the LLC? If so, how do I do that?

jjray said...

Reply to Anonymous. The fact that your husband's LLC was a single member entity does not change the discussion above, in my view. The LLC interest becomes part of your husband's estate. This means you have to go through the probate court process to gain control of the LLC.

Jeff said...

Just want to understand. If an LLC is solely owned by one person (no wife or children) and something happens to that owner, what happens to the LLC and all the employees? I was told the LLC goes away. I hope that is wrong.

Anonymous said...

SM: My husband and I ran a consultancy together. He registered the company as a LLC as a sole member. However, I am listed as the president of the company on the New Jersey Business Entity Status Report. My husband has recently passed away. Do I become the sole member if I register the company again or do I have to probate this? Also, he signed an agreement with a UK company for the licensing of their name. The agreement does not have a termination date. Can they pull that away because my husband has passed away? or does the company still have the right to use the name?

Anonymous said...

My wife and mother will form a LLC Partnership to buy and manage real estate. When mother passes away or is not able to delegate decisions to continue the LLC, am I to assume my wife will take over providing it is in the operating agreement? Also, can mother pass full ownership to daughter without other siblings attestation or getting involved looking for a share of the corporation?

jjray said...

Reply to Anonymous of 4-11-12:
As to management of the LLC, this issue can be addressed in the operating agreement.

As to the estate planning issue you described, that is not a matter generally addressed in the operating agreement per se (i.e., bequeathing an ownership interest after death of a member); however, buy-sell agreements and preventing an heir of a deceased member from becoming a new member without the authorization of the surviving member(s) are mechanisms that can be drafted into an operating agreement to help manage this issue. Seek further advice from a local attorney.

Anonymous said...

My business partner just passed away on Jan 24, 2012. We were a multi member LLC. Our operating agreement doesn't spell out the death of a member. Her husband has agreed to pay me half of her debt and I am continuing the business. When calculating his half should I use the date of her death or the last day of the month she died? We are in the state of AZ.

Jerry said...

My business partner in our Georgia llc passed away last month and was not married,so his half of the company goes to his son and daughter.My partner and I had been working on our company for over a year,and were approximately three months from having our product ready to bring to market. The company is not making any money,but quite a bit more money needs to be put into the company to bring the product out. I want the company to succeed,but it can't with them involved. We were going to add some amendments to our operating agreement to cover a situation like this,but unfortunately he passed away before we got it done. Any ideas how I should approach them would be most welcome.